Intel: Sure They’d Like Apple’s Foundry Biz, Says Susquehanna

By Tiernan Ray

Susquehanna’s Christopher Caso this morning reviews the state of semiconductors in advance of the Computex trade show in Taiwan next week, but he also offers some thoughts on the notion Intel (INTC) is looking to sell contract manufacturing services to Apple (AAPL) for the latter’s chips, a subject of some speculation of late.

Caso is hoping to learn what Q2 holds for PCs given a large inventory build in Q1.

“Our analysis indicates that those [PC original design manufacturers] grew inventory by about 35%, quarter over quarter, in 1Q, representing a rise of nine forward days,” writes Caso, “We believe the inventory growth was driven by Japan-related supply-chain fears, and most of those supply issues appear to have been resolved. Thus, we think an uptick in notebook demand is needed to absorb this inventory.”

High inventory levels and “continued sluggish PC trends” are a risk for PC-related chip names, including Intel, Intersil (ISIL), Nvidia (NVDA), and Advanced Micro Devices (AMD), he writes, and he rates all three Neutral. However, he also thinks some detail about AMD’s forthcoming “Llano” chip for notebooks next week could be a boost to the shares.

Until Intel shows a real ability to fight off the threat of incursion from chips based on ARM Holdings (ARMH) designs, the stock will trade sideways, he thinks.

The new roadmap for Intel’s chips, unveiled at last week’s investor day, makes the company competitive, but the problem is that ARM and its partners are bringing chips with prices of $15 to $20 into the PC market, with the expected release next year of the next version of Microsoft’s (MSFT) Windows, which will be ARM-compatible. That threatens Intel’s traditional ability to “segment” the computer market and charge more for PC processors.

(I would point out that a piece by DigiTimes’s Joseph Tsaithis morning states that Intel is expected to offer its latest “Atom” processor for notebooks, Cedar Trail, at discounts of 30% to 50%, or $42 to $47 a piece, down form $64 to $86 for previous mobile processors.)

Caso echoes recent speculation that Intel is going after the foundry business of Apple:

INTC sent what we thought was a clear message [at the investor day presentation] that it was very interested in some type of foundry relationship with AAPL. We draw a number of conclusions from INTC’s comments. First, we believe AAPL’s foundry business is clearly up for grabs – and that makes sense given the recent lawsuit between AAPL and Samsung, AAPL’s current foundry partner. In addition, at least one of the reasons that INTC would want that business would be to prevent the business going to TSMC. We think that INTC will increasingly see TSMC as a competitor going forward, since TSMC presents the greatest challenge to INTC’s current process advantage. As TSMC’s process capability gets better, it enables INTC’s ARM-based competitors, and if TSMC gets the AAPL business it increases TSMC’s scale and makes the company a more effective competitor. Finally, since the discussion still appears to be ongoing, it leads us to believe that the business is likely still up for grabs. However, we believe TSMC is a more likely partner than INTC.

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There are 2 comments

MAY 26, 2011 3:09 P.M.

bud u. wrote:

Hiring INTC to build AAPL's chips would be like hiring a fox to watch your chickens! AAPL is clearly in the driver's seat in this picture. Plus, INTC only gets into the foundry biz when times are tough, then exits as things improve. TSM and Morris Chang have a great reputation in the foundry business. See the IEEE Spectrum for a great story on Chang and TSM. I agree that TSM will soon share in some of AAPL's ARMH based devices. AAPL and TSM already have a long standing foundry relationship. TSM is a core holding for any tech portfolio. Pays a nice dividend too!

MAY 26, 2011 5:10 P.M.

techy46 wrote:

What Intel said was they'd be interested in fabbig 3rd party chips with IA cores and not ARM cores. THat means Apple's A5 is very unlike especially at 22nm and definitely NOT 3D. The pro ARMH analysts are trying to sell the Intel ARM fab story but it's not happening. Second, Microsoft Windows 8 on ARM will NOT run X86 3rd party appllications unless they were recompiled on ARM and offered as separate versions. Lastly, Intel's server chip at $200-4000 per chip are it's bread and butter. ARMH isn't going there in the near future. Sell half your APPL, ARMH and QCOM and buy some INTC, MSFT and NOK.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.